The new centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) generally is effective for tax years beginning on or after Jan. 1, 2018. Among other things, the BBA provides rules for making adjustments to partnership-related items on already-filed partnership tax returns. Partnerships do this by filing an administrative adjustment request (AAR) with the IRS. The IRS does this during a BBA administrative proceeding.
Under the BBA, a partnership files an AAR to change an already-filed return. An AAR generally must be filed within three years of the date the partnership return is filed. If the adjustments in the AAR result in an imputed underpayment, the partnership can choose to pay the imputed underpayment or push out the adjustments to the partners for the year to which the adjustments relate (reviewed year partners). An imputed underpayment is the tax imposed on the partnership under IRC Section 6225, generally computed by multiplying the appropriately netted adjustments by the highest tax rate for the tax year. AAR adjustments that do not result in an imputed underpayment (generally taxpayer-favorable adjustments) must be pushed out to the reviewed year partners.
Under the pushout, the reviewed year partners compute additional tax due (or the reduction in tax due) using the information for the reviewed year. However, the increase or decrease in tax is reported on the tax return for the tax year in which the reviewed year partners received notification of the adjustments from the partnership, and tax due must be paid when the tax on that return is due. Reviewed year partners that amended their returns prior to the BBA and got the benefit of taxpayer-favorable adjustments in the reviewed year might be surprised to learn that, under BBA, taxpayer-favorable adjustments cannot be taken into account until the tax year that corresponds with the year in which the partners receive notification of the pushout adjustments.
BBA administrative proceeding
Generally, the IRS begins a BBA administrative proceeding by sending the partnership a notice of selection for examination. Then, both the partnership and the partnership representative receive a notice of administrative proceeding (NAP). The partnership representative can be changed after the partnership receives a notice of selection for examination.
During a BBA examination, the IRS agent will provide the partnership with a preliminary list of proposed partnership adjustments. The preamble to the final BBA regulations states that the partnership will have an opportunity to go to the Appeals Office to challenge these preliminary proposed adjustments.
Next, the IRS agent will provide the partnership with a notice of proposed partnership adjustments (NOPPA). The NOPPA will include proposed IRS adjustments and the imputed underpayments resulting from these adjustments. The NOPPA may include multiple imputed underpayments as well as adjustments that do not result in imputed underpayments.
The NOPPA issuance begins the taxpayer’s 270-day period to request modifications to an imputed underpayment. Modifications, if granted by the IRS, generally will reduce the imputed underpayment. Modifications may be requested only by the partnership representative. The preamble to the BBA final regulations states that the partnership will have an opportunity to go to the Appeals Office to challenge a denial of a request for modification.
No sooner than 270 days after the NOPPA is issued, the IRS will issue the final partnership adjustment (FPA), which includes the IRS’ final determination of adjustments, any resulting imputed underpayments, penalties, and interest, as well as any adjustments that do not result in imputed underpayments. The partnership has 90 days from the date the FPA is issued to file a petition in court to challenge the FPA. The partnership also has 45 days from the date the FPA is issued to elect under IRC Section 6226 to push out the adjustments to the reviewed year partners rather than pay imputed underpayments. If the partnership elects to push out, it also must file and furnish a statement showing each reviewed year partner’s allocable share of the adjustments and file an adjustment tracking report with the IRS. If the partnership files a petition in court and makes a pushout election, the statements are not due until after the court makes a final determination.